Dept. of Rev. v. River's Edge Investments, LLCDept. of Rev. v. River's Edge Investments, LLC
BREWER, J.
The judgment of the Tax Court is affirmed. The supplemental judgment awarding attorney fees is vacated, and the matter is remanded to the Tax Court for further proceedings.*
Case Summary: After the taxpayer successfully challenged the 2008-09 real market value of a convention center, the Department of Revenue (department) and Deschutes County Assessor (assessor) appealed, arguing that the correct real market value of the property was significantly higher. The Tax Court agreed with the taxpayer. Because the department failed to develop an income approach – and did not have a credible explanation for that omission – the Tax Court concluded that it could place no reliance on the department‘s appraisal. According to the Tax Court, the department‘s approach conflicted with the requirements of Measure 50 and also violated accepted appraisal principles. The Tax Court awarded attorney fees to the taxpayer. The department and assessor appealed both determinations. Held: (1) under the facts of this case, the Tax Court did not err in disregarding the department‘s appraisal based on the appraiser‘s failure to explain the significant departure from standard appraisal practices; (2) evidence in the record supported the Tax Court‘s decision to rely on the income approach – a failure to consider the department‘s cost approach was not error; and (3) the Tax Court‘s conclusion that Measure 50 prohibited the consideration of outside characteristics was not necessary to its decision and was of questionable validity. Because the attorney fee award relied, at least in part, on the Tax Court‘s Measure 50 conclusion, the Court vacated the award and remanded that issue to the Tax Court for consideration in light of its opinion.
The judgment of the Tax Court is affirmed. The supplemental judgment awarding attorney fees is vacated, and the matter is remanded to the Tax Court for further proceedings.
BREWER, J.
This is an appeal from a Tax Court decision involving the value of a convention center in Bend, Oregon, for property tax purposes for the 2008-09 tax year. The taxpayer who owns the convention center also owns a hotel across the street. The convention center and the hotel are held in different property tax accounts. Taxpayer‘s appraisal valued the convention center at $4,130,000, after applying two different approaches to valuation—the cost approach and the income approach (described in more detail below). The appraiser for the Deschutes County Assessor (assessor) and the Department of Revenue (department) appraised the convention center at $16,700,000, after applying only the cost approach to valuation. The Regular Division of the Tax Court rejected the department‘s appraisal for two independent reasons. First, the court held that Measure 50 (codified as
The department and the assessor have appealed to this court, raising a narrow range of issues.1 As we explain, we affirm the Tax Court‘s decision to reject the department‘s appraisal on the ground that it was unpersuasive. Because that independent reason supports the Tax Court‘s decision, we affirm its judgment, and we need not decide whether Measure 50 requires valuing the property in each property tax account separately. Because it was based in part on the Tax Court‘s Measure 50 analysis, we vacate the award of attorney fees and remand for further proceedings.
Before turning to the facts of this case and the Tax Court‘s holding, it is useful to establish the legal context in which those issues arise: taxation of real property. We review the general principles and elaborate only on the details that are in play in this case.
A. Real Market Value and Appraisal
1. Real market value
The real market value of property is the starting point for determining the amount of property tax. See
2. Maximum assessed value and Measure 50
The real market value of property, however, is not necessarily the assessed value that goes on the tax roll. That qualification derives from Measure 50, a constitutional amendment enacted in 1997 (codified as
For purposes of determining compliance with Measure 50, “property” means “[a]ll
3. Appraisal: cost, income, and comparable sales
To determine the real market value of property, appraisers generally consider three different approaches to valuation: cost, income, and comparable sales. OAR 150-308.205-(A)(2)(a) (requiring the consideration of cost, income, or sales comparison approaches);8 Hewlett-Packard Co., 357 Or at 603. The cost approach estimates value from the cost that would be needed to construct a similar property; the income approach estimates value from the income that the property could be expected to generate; and the comparable sales approach estimates value from the prices paid for similar properties. See id.
An appraiser must consider all three approaches, even if the appraiser ultimately cannot use one or more of them in developing the appraisal. OAR 150-308.205-(A)(2)(a) (recognizing that some approaches cannot be applied to a particular property, but “each [approach] must be investigated for its merit“); see Hewlett-Packard Co., 357 Or at 603. When an appraiser uses more than one approach, the resulting values suggested by each approach may not be identical. The appraiser then must reconcile those value indications into a single, final value. Id.; see also Appraisal Institute, The Appraisal of Real Estate 65 (12th ed 2001) (“The final analytical step in the valuation process is the reconciliation of the value indications derived into a single dollar figure or a range into which the value will most likely fall. The nature of reconciliation depends on the appraisal problem, the approaches that have been used, and the reliability of the value indications derived.“).
4. Appraisal of especial property
In some cases, a property has no immediate market value. In that circumstance, the real market value is determined based on just compensation. See
“Valuation of Especial Property: Especial property is property specially designed, equipped, and used for a specific operation or use that is beneficial to only one particular user. This may occur because the especial property is part of a larger total operation or because of the specific nature of the operation or use. In either case, the improvement‘s usefulness is designed without concern for marketability. Because a general market for the property does not exist, the property has no apparent immediate market value. Real market value must be determined by estimating just compensation for loss to the owner of the unit of property through either the cost or income approaches, whichever is applicable, or a combination of both.”
OAR 150-308.205-(A)(3).
II. FACTS AND TAX COURT PROCEEDINGS
A. Facts
As noted, the property at issue here is a convention center and related land in Bend.
At trial, each side presented an appraisal of the property. Neither of the appraisals used the comparable sales approach. See River‘s Edge Investments LLC, 21 OTR at 474 (noting that neither appraiser “developed a market indicator of value“). The department‘s appraiser concluded that the highest and best use of the property as improved was as a convention center “used in conjunction with” taxpayer‘s hotel. The department‘s appraiser used only the cost approach in valuing the property. He concluded that, as of January 1, 2008, the property should have been valued at $16,700,000.
The department‘s appraiser did not use an income approach. He concluded that the convention center property would increase hotel room rentals, and so the income from those extra hotel rentals should be counted in the income approach toward the real market value of the convention center. However, because taxpayer did not have information regarding the extra room rentals that derived from the convention center, the department‘s appraiser concluded that he could not use an income approach.9
The Tax Court later questioned the department‘s appraiser about his decision not to perform an income approach analysis. The appraiser explained that it would have been possible to value the hotel and convention center as a package and then apportion those values between the two properties. The court then asked why the appraiser had not employed that apportionment methodology in using an income approach analysis:
“[THE COURT]: We‘ve got a problem with valuing just one parcel. We‘re all scratching our heads. We‘re worried that using just a focus on the convention center is lead—could be leading us astray. So maybe as a check, maybe as a valuation technique, and because you‘ve done it elsewhere, you could value a package of two properties and then do an allocation. You said you could and you would have done it on the cost. Then you said, but I wouldn‘t have done it on the income. Why not?
“THE WITNESS: I—
“[THE COURT]: You had the information. You testified to that. Why didn‘t you do the exercise?
“THE WITNESS: Why didn‘t I—okay. I didn‘t do the entire hotel and convention center. I didn‘t—
“[THE COURT]: I know you didn‘t. My question is why didn‘t you?
“THE WITNESS: Because I was—my understanding of the 308.205, especial use property, I didn‘t feel like the income approach was a proper approach.
“[THE COURT]: Why? Other than a bald conclusion with no support, why? Just because you didn‘t feel that way, it won‘t do it for me.
“THE WITNESS: Well, I—that‘s my thinking at the time. I can tell you now I wish I had. But that was my thinking at the time that this is especial use property and in order to—
“[THE COURT]: But especial use property contemplates property that‘s part of a larger total operation; right?
“THE WITNESS: That‘s correct.
“[THE COURT]: More than one property perhaps.
“THE WITNESS: Correct.
“[THE COURT]: That‘s what we have here. And you‘ve testified that in other circumstances, you started down that road and I told you to stop. But in other circumstances you‘ve actually done that package and allocation process, haven‘t you? “THE WITNESS: Yes.
“[THE COURT]: So the only reason you didn‘t do it here is because you didn‘t do it here?
“THE WITNESS: That and just compensation, the portion that requires just compensation.”
Taxpayer presented evidence of a substantially lower value. Taxpayer‘s appraiser began with a somewhat different highest and best use for the property: As a standalone convention center. Taxpayer‘s appraiser then used both cost and income approach analyses. His cost approach analysis was substantially similar to the one performed by the department‘s appraiser, suggesting a value of $15,460,000. The income approach analysis, however, suggested a much lower value: $4,130,000. Taxpayer presented expert testimony that the income approach represented the more accurate value.
B. Tax Court‘s Ruling on the Merits
On the valuation issue, the Tax Court ultimately agreed with taxpayer. The Tax Court‘s opinion may be broadly broken down into two separate parts. In the first part, the Tax Court evaluated the department‘s appraisal and rejected it. River‘s Edge Investments LLC, 21 OTR at 472-77. In the second part, the Tax Court independently evaluated taxpayer‘s appraisal and concluded that it was reasonable. Id. at 477-78. In short, the Tax Court did not merely accept the taxpayer‘s appraisal by default.
Substantively, the Tax Court rejected the department‘s appraisal because it contained only a cost approach; it did not contain an income approach. Id. at 474-75. It was not merely the absence of an income approach that the court found critical, however. It was the appraiser‘s inability to offer a good explanation for failing to perform the income approach. Id. at 475. As noted, the department‘s appraiser had explained his decision not to use the income approach on the ground that he did not have information on hotel income that identified the extra income received by the hotel as a result of the convention center. Id. The Tax Court found that explanation problematic for several reasons. Id. at 475-76.
First, the Tax Court noted that Measure 50 caps maximum assessed value increases at three percent per year, see
Second, the court concluded that the department‘s appraisal was unpersuasive, even aside from any Measure 50 issue. According to the court, the decision of the department‘s appraiser not to perform an income approach analysis was “a serious departure from appraisal practice“—one that, “[i]f not adequately justified, * * * would lead the court to place no reliance on the appraisal.” River‘s Edge Investments LLC, 21 OTR at 474-75.
The court then explained why it rejected the appraiser‘s reason for concluding that the income approach required considering hotel income attributable to the convention center.11 First, adding hotel income to convention center income would create a risk of double-counting that income toward the value of both properties. Id. at 475. While the convention center was expected to produce more revenue for the hotel, according to the court, the extra hotel income should be counted as hotel income, not convention center income. Id. Second, the appraiser‘s reasoning depended on it being legally significant that the taxpayer owned both the hotel and the convention center, when “the identity of an owner is not a factor that is taken into account in valuation of property.” Id. at 476 (adding that nothing in the record showed that the convention center and hotel had to remain owned by the same party).
The Tax Court noted the emphasis that the department had placed on the especial property rule. The court questioned the relevance of the rule to the issues presented by this case: The rule provides only that the comparable sales approach is not used to value especial property, and neither party relied on the comparable sales approach in their appraisals. Id. at 474.12 The Tax Court concluded that the department‘s appraiser had not offered a good reason for failing to use an income approach analysis, and his failure to do so was a departure from fundamental appraisal principles. Id. at 477. Accordingly, “the court place[d] no reliance on his conclusion of value.” Id.
To sum up the court‘s reasoning: the department had argued that it was entitled to assign income from some of the hotel rooms to the convention center to determine the value of the convention center using the income approach. The department was unable to do that, however, because the hotel‘s records did not show how much additional rental income for the hotel the convention center generated. The Tax Court‘s concern was twofold. First, the department‘s argument, if accepted, would lead to counting income from the same hotel rooms twice if it used the income approach to value both the hotel and the convention center. Second, if the department wanted to treat the two properties as a single unit, it would need to combine all the income from the two, determine the combined value, and then allocate the value between the two properties. The department could not do the former, and it had not done the latter.
The Tax Court explained, however, that its rejection of the department‘s appraisal did not necessarily mean that it should accept the taxpayer‘s appraisal by default. Id. at 477. The court therefore independently examined whether the taxpayer‘s proposed real market value was reasonable. Id. at 477-78. In doing so, the court agreed with taxpayer‘s appraiser that the income indicator was the better basis from which to determine value:
“The property is an income producing property. It is in its early stages of operation and came onto the scene at one of the worst times in American economic history.
The court considers the income indicator to be the most reliable indicator of value in this situation. The department has not established that the elements employed by the witness for taxpayer were unreasonable. Accordingly, the court accepts as reasonable the value conclusion of taxpayer‘s expert witness.”
Id. Accordingly, the court found that the 2008-09 real market value for the subject property was $2,668,000.13 Id.
C. Tax Court‘s Ruling on Attorney Fees
Under
III. DISCUSSION
A. Standard of Review
The department challenges the Tax Court‘s decision on the merits and its decision awarding attorney fees against the department. In both challenges, our standard of review is the same: We review the Tax Court‘s legal determinations for errors of law, and we review its factual findings for lack of substantial evidence in the record. See
B. Assignments of Error on Merits
As to the Tax Court‘s decision on the merits regarding the value of the convention center, the department asserts a narrow range of issues. Specifically, its assignments of error are as follows:
“The [T]ax [C]ourt misinterpreted the provisions of Measure 50, and the effect of those provisions on
ORS 308.205 , when it held that the highest and best use and real market value of property must be determined without reference to any property outside of the tax account under appeal.”
“The [T]ax [C]ourt misinterpreted OAR 150-308.205-(A)(3) [the especial property rule] when it held that the department‘s cost approach should be given no weight because the department did not also perform an income approach to value the property.”15
As a prudential matter, we begin with the department‘s arguments regarding the administrative rule on especial property, OAR 150-308.205-(A)(3), because it represents the
We believe that the department‘s first argument misreads the Tax Court‘s opinion. The court recognized that the especial property rule requires an appraiser to consider the various approaches to valuation and that the department‘s appraiser had failed to develop an income approach. River‘s Edge Investments LLC, 21 OTR at 474 (appraiser “did not develop an income indicator“). It was the appraiser‘s lack of good reason for not using the income approach, however, that was critical to the court; it put into question the credibility of the appraisal. Id.
As we noted, the Tax Court first explained its general position:
“[T]he department‘s expert witness did not develop an income indicator. That is a serious departure from appraisal practice. Appraisal Institute, The Appraisal of Real Estate 130 (13th ed 2008). If not adequately justified, it would lead the court to place no reliance on the appraisal of the expert who took the departure.”
Id. at 474-75 (emphasis added). The court then concluded that the appraiser‘s justification for not performing an income analysis was deficient:
“The justification given by the appraiser for the department for this departure from standard practice was that the income information he had for the convention center did not include income augmentation experienced by the hotel by reason of the existence and operation of the convention center. That explanation is deficient for two reasons.”
Id. at 475 (emphasis added). Because of the deficiencies (which the court discussed in detail), the court ultimately concluded that there had been
“no reason to depart from fundamental appraisal principles or the consideration of the income method required by OAR 150-308.205-(A)(3). Because the expert witness for the department made such departures, the court places no reliance on his conclusion of value.”
The department‘s argument that the Tax Court misinterpreted the especial property rule thus fails because it challenges a conclusion that the Tax Court never made. Contrary to the department‘s position, the Tax Court did not require all appraisals of especial property to use both a cost approach and an income approach. The Tax Court merely held that an appraisal‘s credibility is harmed when the appraiser declines to use one of the two remaining approaches to valuation in the absence of a credible explanation. The department offers no argument as to why the Tax Court would have erred in concluding that that affected the credibility of the department‘s appraisal.
The department‘s second argument is that the Tax Court was required to consider the cost approach that its appraiser had performed, even if the court had correctly concluded that the department‘s appraiser also should have performed an income approach. According to the department, there is no authority under the especial property rule for the Tax Court to refuse to consider the department‘s cost approach. We do not find that argument persuasive.
The department‘s argument appears to assume that the mere existence of a cost approach analysis would have affected how the Tax Court determined the final value of the property. That assumption, however, is inconsistent with the reconciliation process in appraisals. A final value is not determined by
In this case, the Tax Court explicitly found, when evaluating the taxpayer‘s appraisal, that the income approach was the more correct approach to valuation. River‘s Edge Investments LLC, 21 OTR at 478. The weight to be given to the various approaches is a question of fact, and evidence in the record supports the Tax Court‘s determination. See Pacific Power & Light Co. v. Dept. of Rev., 286 Or 529, 533, 596 P2d 912 (1979) (“While, under the statute and rule, it is allowable for defendant to use only one approach in valuing property, whether in any given assessment one approach should be used exclusive of the others or is preferable to another or to a combination of approaches is a question of fact to be determined by the court upon the record.“); see also Brooks Resources Corp. v. Dept. of Revenue, 286 Or 499, 505-06, 595 P2d 1358 (1979) (although income approach was “speculative,” the finder of fact “may decide as a matter of fact that despite its inadequacies, the income approach is a better measure of value than the cost approach with respect to” the property at issue (emphasis omitted)). Because the Tax Court permissibly chose to accept the income approach valuation, the department‘s cost approach simply would not have affected the Tax Court‘s final valuation decision.
In sum: The Tax Court determined that the income approach—not the cost approach or a combination of the cost and income approaches—was applicable in this case. The department has not shown that the Tax Court erred in making that determination, either factually or legally. Because the Tax Court permissibly made that determination, the details of the department‘s cost approach would not affect the Tax Court‘s final conclusion on valuation. We thus find no merit in either of the department‘s arguments based on the especial property rule, OAR 150-308.205-(A)(3).
D. Measure 50
The department‘s second assignment of error is that the Tax Court incorrectly interpreted Measure 50 to require that a property‘s highest and best use and its real market value be determined without reference to property outside the tax account at issue on appeal.
In order to assess the department‘s argument, we review in greater detail the Tax Court‘s holding regarding Measure 50. After explaining that Measure 50 required the assessed value to be the lesser of the maximum assessed value or the real market value, the court noted that
“Consistently with the constitution, the assessed value is the lesser of the [real market value] or the [maximum assessed value] for ‘property.’
ORS 308.146(2) . For purposes of determining whether the [assessed value] of property exceeds the property‘s [maximum assessed value], ‘property’ means, except for centrally assessed property not relevant here, ‘[a]ll property included within a single property tax account.’ORS 308.142(1)(a) .”
River‘s Edge Investments LLC, 21 OTR at 473 (final alteration in original).
Because the real market value for property in a tax account was compared to the maximum assessed value for property in the same account, according to the Tax Court, the real market value could not include value from
As we understand the Tax Court‘s rationale, it drew from Measure 50 the idea that income from property in separate tax accounts should be treated separately and, for that reason, the department‘s efforts to attribute some hotel income (from one tax account) to the convention center (in another tax account) were impermissible. As the court saw it, the notion of discrete tax accounts and the provisions of Measure 50 provided a simple way of separating one income-producing property from another.
The concern that we have with that rationale is that tax accounts are an administrative means of tracking property that may or may not reflect whether the property contained in one or more tax accounts is a single economic unit. See
It is universally recognized that the location of real estate affects its value—so much so that the principle needs no citation. A convention center is worth more next to a hotel than to a factory; a gasoline station is worth more next to a freeway than to a rural road; a house is worth more next to a golf course than to a railway. The real market value of property thus will undisputedly be affected by some “characteristics of property in a different property tax account,” even though the Tax Court seemingly thought otherwise. See River‘s Edge Investments LLC, 21 OTR at 473 (real market value is not to be determined “by reference to the [real market value] or any other characteristic of property in a different property tax account” (emphasis added)). Measure 50 does not exclude those sorts of characteristics from the valuation process.17
Neither does Flavorland Foods meaningfully inform our analysis. That case dealt only with the internal aspects of a single property tax account: Specifically, this court considered whether the phrase “each unit of property” in Measure 50 established a single maximum assessed value for all of the property in a tax account, or separate maximum assessed values for the land and the improvements. 334 Or at 567. When this court in Flavorland Foods stated that the voters intended Measure 50 “to refer to all the property in a property tax account,” id. at 578, the court was only indicating that the property in a property tax account should be treated as a unified whole. The court did not address the relationship between property held in different property tax accounts or make any statement about how real property should be valued.
We do not believe, however, that it is necessary for us to resolve the Measure 50 question in this case, because, as indicated, the Tax Court also found another independent and fully adequate reason for accepting the real market value proposed by taxpayer. The issue in this case is the real market value to be assigned to the property. In determining the property‘s value, the Tax Court had before it two appraisals. As discussed, the court concluded that the department‘s appraisal was not credible. The court‘s conclusion on that issue did not depend on its holding regarding Measure 50. See River‘s Edge Investments LLC, 21 OTR at 475 (explaining why appraiser‘s justification for not performing income approach was deficient; “even if Measure 50 did not compel separate consideration of the convention center and the hotel, basic valuation principles would“). The court then independently evaluated taxpayer‘s appraisal, concluded that it was reliable, and accepted taxpayer‘s valuation. See id. at 477-78. Again, the court‘s decision to accept taxpayer‘s valuation did not depend on Measure 50.
Those conclusions support the result that the Tax Court reached. The court accepted the real market value of the only credible appraisal before it. The department has not successfully challenged any of those conclusions, and so we must affirm the judgment. Nothing that we could say about Measure 50 would change that.
E. Attorney Fees
In addition to its arguments on the merits, the department also challenges the Tax Court‘s award of attorney fees to taxpayer. We turn now to that issue.
The Tax Court is authorized to award attorney fees when the court rules in favor of the taxpayer in an ad valorem property tax case. The relevant statute,
“(4)(a) If, in any proceeding before the tax court judge involving ad valorem property taxation, exemptions, special assessments or omitted property, the court finds in favor of the taxpayer, the court may allow the taxpayer, in addition to costs and disbursements, the following:
“(A) Reasonable attorney fees for the proceeding under this subsection and for the prior proceeding in the matter, if any, before the magistrate[.]”
In reviewing an award of attorney fees under that statute, the ultimate question is whether the Tax Court abused its discretion. See Clackamas Cty. Assessor v. Village at Main Street, 352 Or 144, 151, 282 P3d 814 (2012) (so noting). The Tax Court‘s exercise of discretion is guided by the factors found in
The department asserts that the award of fees was inappropriate because the department acted in good faith and presented objectively reasonable arguments to the Tax Court. The department‘s appraiser had a reasonable basis in fact and law, it asserts, for not using the income approach and instead relying on the cost approach. Taxpayer counters, consistently with the Tax Court‘s analysis, that the award of attorney fees was justified.
In light of our concerns about the Tax Court‘s holding with respect to Measure 50, we conclude that we should vacate the attorney fee award and remand to that court for further consideration. The Tax Court‘s conclusions about Measure 50 thread through most of the factors that the court identified in favor of an award of attorney fees. It was
“(a) The conduct of the parties in the transactions or occurrences that gave rise to the litigation, including any conduct of a party that was reckless, willful, malicious, in bad faith or illegal.
“(b) The objective reasonableness of the claims and defenses asserted by the parties.
“(c) The extent to which an award of an attorney fee in the case would deter others from asserting good faith claims or defenses in similar cases.
“(d) The extent to which an award of an attorney fee in the case would deter others from asserting meritless claims and defenses.
“(e) The objective reasonableness of the parties and the diligence of the parties and their attorneys during the proceedings.
“(f) The objective reasonableness of the parties and the diligence of the parties in pursuing settlement of the dispute.
“(g) The amount that the court has awarded as a prevailing party fee under
ORS 20.190 .“(h) Such other factors as the court may consider appropriate under the circumstances of the case.”
the only explicit “other factor” that the court found under
As noted, the decision to award attorney fees is a discretionary one, granted to the Tax Court. Our opinion here substantially affects the Tax Court‘s original basis for awarding fees. For that reason, we vacate the Tax Court‘s award of attorney fees and remand to that court. Because it is not clear whether the Tax Court will choose to award attorney fees on remand without regard to the Measure 50 issue, we do not at this time address the department‘s other challenges to the present attorney fee award.
IV. CONCLUSION
On the merits, because the otherwise-unchallenged credibility determination by the Tax Court adequately and independently supports its decision to accept taxpayer‘s
valuation, we affirm that part of the court‘s opinion on the merits and its judgment. Although we have concerns about it, we do not decide the merits of the Tax Court‘s conclusion that Measure 50 and its enabling statutes prohibit valuing a property
The judgment of the Tax Court is affirmed. The supplemental judgment awarding attorney fees is vacated, and the matter is remanded to the Tax Court for further proceedings.